Global stocks were offered a glimmer of hope as the ECB hinted at December stimulus, and US markets rebounded after new data showed jobless claims dropped while the economy grew at a faster pace than expected.
But the market is still in search of an elusive stimulus lifeline in this mishmash of pre-election de-risking. Indeed, this is a market entirely tunnel-visioned on reflationary stimulus rotation, which has turned "tech off" as much as "risk-off." And since tech stocks are the most extensive momentum constituents within indices, concentration risk remains a significant worry as pre-election dyspepsia further aggravates the sell-off.
Adding to the tech woes, Apple's shares fell more than 5% in extended trading after the tech behemoth reported a significant decline in iPhone sales but also failed to offer investors any guidance for the quarter ahead, leaving them alone in the dark.
Meanwhile, bond and gold offer no comforts these days. Given the soaring coast to hedge election event risk, some investors are just finding it more comfortable (and probably cheaper) to cut and run rather than try to tack upwind in the pre-election stormy sea.
On the brighter side of the equation, after the latest Covid-induced pullback, markets should now be in a more balanced position going into the big event next week. That should clear the runway for asset prices to react more asymmetrically to the Democratic sweep scenario. So, it could be time to dip some toes back into those stormy seas.
Oil hit yet another rough patch overnight in a perfect storm fashion.
Increasing supply from Libya coincided with the second wave of Covid in Europe which saw WTI touching a low of $34.92 before rebounding on heavy hints by the ECB of new stimulus in December, combined with stronger-than-expected US economic growth.
The OPEC+ decision branches for extending quotas at the November meeting might not be the slam dunk traders had expected. Some of OPEC's most ardent supporters of Riyadh's past compliance position are feeling the economic pressure at home to generate more petrodollars as some members are on the brink of financial collapse.
In turn, the gasoline crack plummeted below $7.00, which will negatively affect refining margins and provides the "poor eye candy" of demand destruction as the struggling global effort to contain the advance of the virus doesn’t go unnoticed by energy spread players.
Whether this is merely posturing in light of Libya's ramp-up to pressure wealthier nations to carry more of the load or not, these fissures in OPEC are coming at the most unwelcome time; the last thing the market needs is more barrels coming to call as we veer for the crux of the matter, which is winter is coming to the northern hemisphere where crowding and social- behavioral patterns could be a frightening source of a seasonality bounce in the Covid curve.
While it’s highly improbable that we’ll have a catastrophic sell-off in oil similar to when prices went negative earlier in the year, what is worrisome for the oil complex is that several of the fundamental remnants from that fateful rollover day remain in play and could pressure oil for weeks ahead.
We’ve been talking about the EUR headwinds for more than a week as it became apparent that not just cases but deaths and hospitalizations in Western Europe were picking up dramatically.
The market lag reaction to selling the Euro is likely due to G-10 traders’ risk proclivities around Covid itself, where the flu either doesn’t matter at all or it matters a whole lot. This week it mattered a lot – even more so when magnified through the pre-election viewfinder amid the crowded trade syndrome (market long EURUSD).
I don’t think the dollar will hold a bid into the weekend on the assumption that the market realizes that it’s just the weak links in the EU economic chain around services and tourism that will bear the lockdown brunt. The overall economic impact is not likely to be anything like we saw in March and April. Plus, I’m hearing US corporates were heavily buying the dollar at month-end, whereas the rebalancing month end signal is to buy EURO.
Also, with the US election only a few days away and given the market will solely focus on one risk event at a time, I cannot envision Covid remaining center stage as the global currency outlook depends more on the US election than anything else. So, as my former boss used to scream across the trading floor when FX mayhem was about to hit the desk, “it’s time to put on your big-boy/girl pants.”
The EURUSD is bouncing off the lows (held right at the 100-day moving average, at 1.1652) on the back of risk crosses squeezing higher. The levels to watch on top are 1.1685-90 and 1.1715-20.
104.00 has been and will continue to be an epic level in USDJPY and should function as a critical pivot. A daily close under 104.00 in USDJPY will unleash a torrent of bearish USDJPY speculators. Until then, it’s tricky to stay short or even remain in the yen game. The US election outcome is more relevant than ever, with a split Congress likely driving JPY strength on fading fiscal-stimulus hopes. In contrast, a blue wave pushes US yields higher which could have a gravitational pull that takes USDJPY higher.
The bullion market is likely to be volatile until the elections; ultimately, the falls will be limited by easy global monetary policies.
But any further equity-related margin selling has to be squeezed out of the gold market first, which will only occur when the equity markets stabilize and start to reverse higher. So far today, stop-loss trap doors are springing due to margin call covering in the equity markets. Not unexpectedly, the Euro tumble provided the magnetic attraction to drag gold lower.
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US stimulus stalemate weighs on all markets; Oil perilously perched on the Covid curve; Traders sell the earnings news. Without stimulus, gold gets no bounce.